1. Why don’t banks hold 100 percent reserves? How is the amount of reserves banks hold related to the amount of money the banking system creates?
2. Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses on bank loans at the two banks cause the value of their assets to fall by 7 percent. Which bank shows a larger change in bank capital? Does either bank remain solvent? Explain.
3. In what sense is inflation like a tax? How does thinking about inflation as a tax help explain hyperinflation?
4. According to the Fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?
5. Define net exports and net capital outflow. Explain how and why they are related.
6. Explain the relationship among saving, investment, and net capital outflow.
7. Why are budget deficits and trade deficits sometimes called the twin deficits?
8. What is capital flight? When a country experiences capital flight, what is the effect on its interest rate and exchange rate?